Companies that set goals for employees, align those goals with broader strategies and vary the performance ratings employees receive tend to outperform their peers in the stock market, according to a new study from HR software provider SuccessFactors Inc.
The SuccessFactors study, slated to be released Wednesday, June 1, found that a 10 percent increase in a measure of goal-setting activity at firms was associated with a 6 percent increase in industry-adjusted stock returns. A 6 percent stock boost also was associated with a 10 percent increase in a measure of the extent to which managers used the full spectrum of the ratings scale when evaluating employees.
Erik Berggren, vice president of global research and customer results at San Mateo, California-based SuccessFactors, says these findings boil down to the simple practices of telling people what they are expected to do and giving them honest feedback.
In other words, he argues, giving better performers higher marks and lower performers lower marks—rather than the common practice of giving the vast majority of employees a “meets expectations” rating—helps organizations execute more effectively and ultimately beat rivals in the stock market.
“Our research shows that companies that invest in their ability to execute, aligning goals to strategy while creating a performance-based culture experience higher shareholder returns,” Berggren said in a statement.
The report, based on 153 publicly traded SuccessFactors customers, is part of a growing body of research quantifying the link between particular people management practices and business results. Amid the expansion of such scholarship, companies are doing more to measure their own human resources activities and discover ties between those processes and financial performance.
SuccessFactors is among the most prominent vendors of talent management software, which refers to tools for key HR tasks such as recruiting, compensation, learning and employee performance management. The company has sought to set itself apart from the competition by calling its products “business execution” applications.
Last year, SuccessFactors published a report showing that a stock portfolio made up of a group of its own customers had outperformed major benchmark stock indices between Oct. 1, 2008, and April 14, 2010. The latest SuccessFactors study again suggests that use of its software is linked to financial outperformance. The report said a 10 percent increase in a measure of the extent to which a company utilizes the SuccessFactors business execution suite was associated with a 4 percent increase in industry-adjusted stock returns.
The importance of the software is that it helps ensure that people do things differently, such as set more frequent goals for employees, Berggren said. “To drive real change in the organization, you need the software.”
SuccessFactors took pains to guard against the charge of bias in the research. The report was written in collaboration with the Wharton School of the University of Pennsylvania and Stanford University’s Graduate School of Business.